- Core inflation continued to ebb in August, extending a multi-month trend…
- ...giving data-dependent cover for the BoC to cut tomorrow…
- ...that reinforces forward-looking arguments for a cut…
- ...that only began to change materially in September
- Canadian CPI, m/m%, NSA, August:
- Actual: -0.1
- Scotia: 0.1
- Consensus 0.0:
- Prior: 0.3
- Trimmed mean CPI: 2.25% m/m SAAR
- Weighted median CPI: 2.8% m/m SAAR
- CPI ex-f&e CPI: 1.6% m/m m/m SAAR
Canadian core inflation cemented a rate cut by the Bank of Canada tomorrow. That was our call before the numbers, and I gave reasons in my morning note about why today’s CPI print didn’t matter anyway (here). The figures didn’t hurt the call either as markets now have a cut fully priced and at least another one on the bag of chips theory (you can’t just take one out…). Shops that thought otherwise would presumably be changing their calls now, or would have to come up with some other new reason for holding out. For the BoC to hold tomorrow would need extremely good arguments in order to avoid materially tightening financial conditions by wiping out priced cuts.
The BoC Call
Until the start of September, markets had only a slight chance at a cut priced for tomorrow. They had spent the whole year trapped in a cycle of pushing out cut expectations and getting disappointed in serial fashion. Cut narratives were delivered on a lark absent enough supporting evidence—until the facts changed relatively recently which motivated a change in our long-held pause rate call. Reciprocal tariffs are gone. The US job market dramatically weakened including massive downward revisions that raise doubts about US resilience and what it means to Canada’s economy. The Canadian job market suddenly began souring. GDP disappointed despite strength in the domestic economy and tracking for Q3 GDP is looking soft which adds to modest slack. There are points and counterpoints about each of these arguments in the cut versus hold cases that I went over in my weekly (here), but the balance of the evidence significantly favours a cut—for now.
CPI Details
First, ignore headline CPI. It accelerated from 1.7% to 1.9% y/y partly due to a shift in year-ago base effects and a mild 0.2% m/m SA rise in August. This measure is distorted by the early April elimination of the consumer portion of the carbon tax which will depress the year-over-year headline CPI reading until next Spring when it should bounce higher once the data starts comparing to a year-ago starting point after April’s carbon tax change.
Key, however, is that all of the core inflation gauges were soft which extends the multi-month softening trend to provide data dependent cover for a cut (chart 1). Forward-looking arguments matter more as argued in my weekly, but current data strengthens the case for a cut.
Traditional core CPI was up by only 1.6% m/m at a seasonally adjusted and annualized rate. Its three month moving average is also just 1.6% m/m SAAR (chart 2).
Trimmed mean CPI was up by 2.25% m/m SAAR (chart 3). Its three-month moving average is just 2.4%.
Weighted median CPI was up by 2.8% m/m SAAR (also chart 3). Its three-month moving average is 2.6%.
CPI excluding the effects of food, energy and indirect taxes was up by 1.6% m/m SAAR and that is our shop’s favourite although there have not been signs that Governing Council agrees. CPI excluding the eight most volatile items was up 0.8% m/m SAAR. CPIX was up 0.8% as well.
Further, breadth pulled back again (chart 4).
Services inflation has been softening (chart 5).
Core goods inflation (ex-food and energy) has also been softening (chart 6).
Recreation/reading/education—or the leisure category—fell –0.2% m/m SA and carries about a 10% weight as travel prices conflicted (chart 7).
Statcan got out the etch-a-sketch for revisions and scribbled what’s shown in chart 8. They don’t revise underlying seasonally UNadjusted price data, but they do revise SA factors each time in a mechanistic model-based way using standard international procedures. The revisions each month cancel out over time in a series of wild ups and downs but lend caution to attaching too much significance to any one month’s data.
Charts 9–17 break down individual parts of the basket. Charts 18–19 break it down in m/m and weighted contributions to m/m inflation. Charts 20–21 do likewise for year-over-year. Also see the accompanying detailed table.
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